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The principle of indemnity is one of the most important legal principles in the field of insurance. Download free textbooks as PDF or read online.
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Basic Insurance Concepts And Principles Before you learn about specific policy types and their provisions, you will need to understand some basic concepts and terms associated with the insurance industry. This chapter discusses concepts that make it easier for you to learn the rest of the material in this course, so it is important for you to master these ideas before moving on to the next chapter.
Identify the definition of insurance CIC 22 ; 2. Recognize the definition of risk; 3. Differentiate between a pure risk and a speculative risk; 4. Identify a definition of peril; 5.
Identify a definition of hazard; 6. Differentiate between moral, morale, and physical hazard; 7. Identify the definition of the law of large numbers. Insurance CIC 22 Insurance transfers the risk of loss from an individual or business entity to an insurance company, which in turn spreads the costs of unexpected losses to many individuals.
If there were no insurance mechanism, the cost of a loss would have to be borne solely by the individual who suffered the loss. In the law, a person is a legal entity which acts on behalf of itself, accepting legal and civil responsibility for the actions it performs and making contracts in its own name.
Persons include individual human beings, associations, organizations, corporations, partnerships, and trusts. Insurance is the legal agreement, or contract, whereby the two parties involved agree to the limits of the indemnification, the circumstances under which it will occur and what things of value consideration will be exchanged by the parties to the contract.
The classification of producer usually includes agents and brokers; agents are the agents of the insurer. Insurer is the principal. Applicant or proposed insured is a person who requests or seeks insurance from an insurer. Beneficiary — the person who receives the benefits from the policy of insurance.
Insured — the person covered by the policy of insurance who may or may not be the applicant or policyowner. Insurer principal — the company who issues a policy of insurance.
Life Insurance — a coverage upon a person's life, and granting, purchasing or disposing of annuities. Policyowner — the person who is entitled to exercise the rights and privileges in the policy and who may or may not be the insured. Premium — the money paid to the insurance company for the policy of insurance. The two types of risks are pure and speculative, only one of which is insurable.
Pure risk refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept. Speculative risk involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable. Perils And Hazards Perils are the causes of loss insured against in an insurance policy. Hazards are conditions or situations that increase the probability of an insured loss occurring.
Hazards are classified as physical hazards, moral hazards, or morale hazards. Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring. Physical hazards are individual characteristics that increase the chances of the cause of loss. Physical hazards exist because of a physical condition, past medical history, or a condition at birth, such as blindness.
Moral hazards are tendencies towards increased risk. Moral hazards involve evaluating the character and reputation of the proposed insured. Moral hazards refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer. Morale hazards are similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness.
Actions taken without forethought may cause physical injuries. Law Of Large Numbers The basis of insurance is sharing risk among a large pool of people with a similar exposure to loss a homogeneous group. The law of large numbers states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be.
When an insurance company issues a policy on a year-old male, the company really has no way of knowing or accurately predicting when he will die. However, the Law of Large Numbers looks at a large group of similar risks — year-old males of similar lifestyles and health conditions — and makes some conclusions based on statistics of past losses. This allows the insurance company to have a general idea about the predicted time of death for this type of insured and to set the premiums accordingly.
Be able to identify a definition or the correct usage of the term loss exposure. Be able to identify risk management techniques. Be able to identify risk situations that present the possibility of a loss. Be able to identify the meaning of adverse selection and profitable distribution of exposures.
Loss Exposure Exposure is a unit of measure used to determine rates charged for insurance coverage. In life insurance, all of the following factors are considered in determining rates:. The age of the insured; Medical history; Occupation; and Sex. A large number of units having the same or similar exposure to loss is known as homogeneous. The basis of insurance is sharing risk among the members of a large homogeneous group with similar exposure to loss.
A profitable distribution of exposures or spread of risk exists when poor risks are balanced with preferred risks, with "average" or "standard" risks in the middle. This is one of the key principles of insurance. Adverse Selection Insurance companies strive to protect themselves from adverse selection, the insuring of risks that are more prone to losses than the average risk. Poorer risks tend to seek insurance or file claims to a greater extent than better risks.
To protect themselves from adverse selection, insurance companies have an option to refuse or restrict coverage for bad risks, or charge them a higher rate for insurance coverage. Risk Situations That Present The Possibility Of Loss In the process of establishing an insurance program, insureds must first identify their exposure to losses, along with the probability of how likely it is that a loss will occur and how "big" the loss might be.
Certain risks, because of the severity of the possible loss, will demand attention above others. For example, an individual who uses power tools to work on avocational woodworking projects is exposed to the possibility of hand injuries. If the individual is a brain surgeon, this would be considered a critical risk of financial loss, since the injury could prevent the person from doing his or her job.
If the individual is, however, a radio announcer, the loss of hand function may be deemed a less "important" risk. Exposures to possible losses should be ranked into appropriate groups and classified in the order of their importance:. In making a decision for establishing an insurance program, it may be wise to apply the following commonsense principles:.
Consider the odds; Don't risk more than you can afford to lose; and Don't risk a lot for a little. Be able to identify methods of managing risk: avoidance, retention, sharing, reduction, transferring. Sharing is a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk- sharing arrangement.
The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring. There are several ways to transfer risk, such as hold harmless agreements and other contractual agreements, but the safest and most common method is to purchase insurance coverage.
One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. Risk avoidance is effective, but seldom practical. Risk retention is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self- insurance when the insured accepts the responsibility for the loss before the insurance company pays.
The purpose of retention is. To reduce expenses and improve cash flow; 2. To increase control of claim reserving and claims settlements; and 3. To fund for losses that cannot be insured. Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.
Be able to recognize the requisites of an ideally insurable risk. Though insurance may be one of the most effective ways to handle risks, not all risks are insurable.
As noted earlier, insurers will insure only pure risks, or those that involve only the chance of loss with no chance of gain. However, not all pure risks are insurable. Certain characteristics or elements must be present before a pure risk can be insured. The loss must be due to chance accidental. The loss must be definite and measurable. An insurable risk must involve a loss that is definite as to cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.
Since insurance policies are legal contracts, it helps if the conditions are as exact as possible. The loss must be statistically predictable. This enables insurers to estimate the average frequency and severity of future losses and to set appropriate premium rates.
In life and health insurance, the use of mortality tables and morbidity tables allows the insurer to project losses based on statistics.
The loss cannot be catastrophic.
Basic insurance concepts and principles
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Basic Insurance Concepts and Principles Flashcards Preview
It may be described as a social device to reduce or eliminate a risk of loss to life and property. The parties in an agreement must be legally competent to enter into the contract. The insurance should pay the amount of premium regularly and compulsorily. A double insurance policy is adopted where the financial position of the insurer is doubtful. This is not an example of the.
Sharing, or pooling, of risk is the central concept of the business of insurance. The idea has the beauty of simplicity combined with practicality. If risks—chances of loss—can be divided among many members of a group, then they need fall but lightly on any single member of the group. Thus, misfortunes that could be crushing to one can be made bearable for all.
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Basic Insurance Concepts And Principles Before you learn about specific policy types and their provisions, you will need to understand some basic concepts and terms associated with the insurance industry. This chapter discusses concepts that make it easier for you to learn the rest of the material in this course, so it is important for you to master these ideas before moving on to the next chapter. Identify the definition of insurance CIC 22 ; 2.
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Chapter 1, Section 1, Page 2 By deleting paragraph 4 of Section 1 and substituting the following paragraph: Intermediaries refer to insurance agents and insurance brokers, including reinsurance brokers.